Taking A HDB Loan: Should You Wipe Out Your CPF OA?

Starting from August this year, homeowners taking a HDB loan to finance for their home purchase can choose to leave up to $20,000 in their CPF Ordinary Account (OA). In the past, there was no such option, and you had to use all of your available CPF OA funds to pay for your flat before taking a HDB loan.

So, with the added flexibility comes decisions you need to make. Here are the pros and cons of wiping out your CPF OA versus leaving them in your CPF OA and taking a greater home loan amount.

Keeping Funds In Your CPF OA As An Emergency Buffer

When this new rule was introduced, one could imagine that it would help homeowners with very tight monthly cashflows to keep a buffer so that in the event there was a loss of income from retrenchment or illness, they could still make monthly repayments to HDB.

$20,000 can provide a pretty comfortable runway of about a year’s worth of instalments, without the need to fork out additional cash!

While this is a valid use case for keeping some funds in your CPF OA, it is crucial to note that in the event you lost your job or have a major health crisis, you will need other forms of financial buffer for your day-to-day expenses, which your CPF OA cannot help you with. Getting adequate health insurance and an emergency fund is a must.

Earning An Additional 1% On Your CPF Monies

As you probably know, CPF members earn an additional 1% on the first $60,000 of their CPF balances, a maximum of $20,000 of which can come from their CPF OA. If you do not already have $60,000 in your combined CPF balances, then not wiping out your CPF OA makes sense, since the 3.5% interest is higher than the HDB home loan interest rate of 2.6%.

However, any additional monies above $60,000 will not earn bonus interest, which means you’re actually paying more (2.6%) in home loan interest compared to what your CPF OA is earning (2.5%).

If your monthly CPF OA contributions is more than your monthly home loan repayments, then it makes sense to calculate how long it would be before you hit the $60,000 limit, and see how much more in bonus interest you’ll actually be earning.

Since HDB loans don’t charge you more for paying down more of your outstanding loan amount, there’s nothing stopping you from maxing out your monthly OA payments once you hit the threshold $60,000.

Wiping Out Your CPF Reduces Your Housing Loan Amount

Obviously, if you choose to leave $20,000 in your CPF OA, your loan quantum increases by that amount.

While the risk of overleveraging would be minimal, since the government already has in place rules like the Total Debt Servicing Ratio (TDSR), you will need to consider the additional interest you’ll be paying on that $20,000.

However, higher loan amounts does mean longer loan tenure and/or monthly repayments, so you’ll need to do the math and see if you can afford the repayments. If your monthly repayment is more than your monthly OA contributions, you’ll need to top up the difference in cash, which can be challenging for some of us. Knowing you have $20,000 in your OA isn’t very reassuring if you’re scrimping to save every dollar each month.

Balancing The Needs Of Today With The Needs Of Tomorrow

Having the option to keep some money in your CPF OA is fantastic, since Singaporeans have been known to take a bank loan just because they don’t want to wipe out their CPF OA when buying flat.

That option comes with choices we need to make, which can be boiled down to balancing our long-term retirement needs (keeping money in our CPF OA gives us a good foundation to build upon) and our short-term requirements (monthly cashflow and meeting mortgage payments).